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Focus: Term of mutual trust and confidence not implied into Australian employment contracts

10 September 2014

In brief: A landmark High Court decision has determined that a term of mutual trust and confidence is not necessary and should not be implied at law into employment contracts in Australia. Special Counsel Eleanor Jewell reports.

 
 

How does it affect you?

  • Policies will not bind employers if it is clear that they are not intended to do so.
  • There is no overarching contractual duty of fairness in dealing with matters such as terminations, grievances or investigations.
  • Employers are free to set up their policies and other arrangements as they wish, subject to unfair dismissal, adverse action, discrimination and safety considerations.

Background

Stephen Barker had been employed by the Commonwealth of Australia (CBA) for more than 27 years, and held an executive position. His contract of employment provided for termination at any time on notice, and also provided for extra payments if his employment was terminated for redundancy. A 'Redundancy, Redeployment, Retrenchment and Outplacement Policy' (Redeployment Policy) provided for a redeployment process. This policy was expressed not to form part of the contract of employment.

On 2 March 2009, Mr Barker was informed that, if he was not redeployed within CBA, his employment was to be terminated on approximately four weeks' notice for redundancy. He was required to work out the day, return his keys and mobile phone and not return to work. His access to his CBA email account, voicemail and the intranet was terminated. Attempts were made to communicate with him about redeployment opportunities before the termination of his employment. These communications were primarily emails to his CBA account, to which he did not have access. His employment was terminated for redundancy, effective 9 April 2009.

Mr Barker's claim

Mr Barker brought proceedings in the Federal Court, alleging that a term was implied into his employment contract that CBA would not do anything likely to destroy or seriously damage the relationship of trust and confidence with him without proper cause.

He alleged:

  • CBA had failed to conduct the redeployment and termination process in a proper manner, thereby breaching the Redeployment Policy and CBA's Equal Opportunity Policy; and
  • that the breach of these policies breached the implied term.

High Court decision

The High Court found that:

  • the term would impose significant obligations on both employers and employees;
  • given the complex policy considerations involved in implying the term, it was a matter better dealt with by legislation rather than judicial intervention;
  • it was not necessary that the term be implied at law into contracts of employment; and
  • the facts of the particular case did not demonstrate that it should be implied as a matter of fact.

Key implications

Whether a term of mutual trust and confidence is implied into employment contracts has been considered in many recent cases. What it would mean if it was implied has been a source of considerable uncertainty and risk for employers.

It has been argued that this term has been breached by employers failing to, for example:

  • act with procedural fairness in investigating grievances or allegations of misconduct; or
  • comply with internal policies and procedures.

Unlike unfair dismissal claims, there is no cap on claims for breach of contract. This means that, if implied, a breach of this term could have resulted in employees being awarded significant amounts in respect of damages.

This source of potential liability has been eliminated by the unanimous decision of the High Court in this case.

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